Monday, December 20, 2010

How Independent Is the Bank of England Under Mervyn King?

Mervyn King
Position Now Untenable
Making the Bank of England independent from political interference was the work of Gordon Brown. On  may 6th 1997, immediately after coming to power, the then chancellor Gordon Brown granted the Bank of England under the then Governor, the late "Steady" Eddy George  operational independence over monetary policy. The bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated Retail Prices Index (RPI).

One has to wonder if Eddy George was still Governor when the banks started to go into meltdown, if things would have been allowed to get as bad as they got? He would almost certainly have backed the then British prime minister Gordon Brown's calls for more banking regulation, 'calls' that were shouted down by the present prime minister David Cameron, and present chancellor George Osborne, who were then in opposition. More recently David Cameron has been applying pressure to Tory and Liberal Democrat MEPs to push for lesser regulation on the banks in Europe and to go easier on them. This was at direct odds with the picture they tried to portray back at home, where they were talking tough on the banks. This Tory led government is deeply duplicitous and their erratic behaviour can only end in tears for the UK.

Remember here that during the general election campaign in a BBC programme called "Ask the Chancellor" Alistair Darling actually exposed then Tory shadow chancellor George Osborne as not knowing that the BoE governed monetary policy and NOT fiscal policy as George Osborne repeatedly said. This from Osborne who was to become the chancellor of Britain at such a vital time and remarkably not one single newspaper and not one TV news programme picked this up and mentioned it.

BoE Governor Mervyn King, has persistently called the big issues incorrectly and he also appears to be politically biased and stands accused of being too close to the Tory led coalition government.

How can King be trusted when he has already been exposed as talking down British politicians to US ambassadors?
 King was "absolutely wrong in the judgment he offered the American ambassador. He was as deceived as others by all that wellbeing, happiness and hugging of David Cameron's campaign camouflage used to disguise his chancellor's iron-fist plan. But it should be no surprise that King mistook the two men's true intent, since he has been consistently wrong in just about all the predictions and prescriptions he has made since he took office. You could almost be guided by his forecasts, by adding a "not".
However, it should be remembered that at that time it was also the Conservative shadow chancellor and PM Osborne and Cameron, that were also calling for Gordon Brown and Alistair Darling to let the banks sink - strangely in direct contrast to what George Osborne has just done in bailing out Ireland! Lining the men together politically yet again, this time PRIOR to the general election!

"In the latest blow to Mervyn King and the Bank, the CBI warned that higher than projected price rises will force policymakers to start raising interest rates in the spring to curb the threat to the economy".

Mervyn King's performance has been erratic and his forecasts nearly always wrong, bad news for someone in his position and even worse news for the general public. There are also clear signs that he is under the political influence of Conservative chancellor and prime minister, George Osborne, and David Cameron, bringing into serious doubt the Bank's independence of the UKs Tory led government.

The CBI said it expected the bank rate to soar more than two percentage points in just two years, with mortgage rates increasing roughly in line – bad news for the 7m borrowers the Bank says are now on variable-rate deals. - This also puts paid firmly to Conservative peer Lord Young's claims that the British have "never had it so good". Young caused controversy by saying Britons had "never had it so good" in this "so-called recession".  He made the comments to a journalist, while sitting down eating a very expensive lunch and drinking very expensive wine in a top London restaurant.

"The CBI was previously expecting inflation to peak at 3.3pc as January's rise in VAT translates into higher prices, but the rate of price rises has already reached that level, in November.
Its new forecast is significantly higher than the Bank's central projection for CPI to hit around 3.6pc in the first quarter of next year, before falling back below the 2pc target in 2012.

The CBI thinks such inflation will only dip below target briefly, before picking up again to end 2012 at 2.4pc, which would pose questions about the Bank's credibility.

Inflation as measured by the retail prices index (RPI) – which includes more housing costs – will follow an even higher path, hitting 5pc at the start of next year, the organisation expects. "

The rise in inflation is serious news for householders, it is also serious news for the economy which is already under serious pressure and the pressure is set to increase sharply as Osborne's controversial severe austerity measures start to kick in and Vat rises to a massive 20% in January 2011. If the bank and King cannot keep a lid on inflation and forces interest rates to rise, then thousands are set to lose their homes and businesses as mortgages and loans become more expensive. Add this in to the alarming jump of 35.000 in the unemployment figures and we could be beginning to see the signs of a double dip recession, especially as there are no signs of the hundreds of thousands of extra jobs that need to be created in the private sector and that have been promised by the Tory prime minister David Cameron and the Tory Chancellor George Osborne which are desperately needed to take up the hundreds of thousands of public sector workers who are now beginning to lose their jobs as a direct result of this Tory led coalition government's interference in public sector work places.

However, there is a fundamental flaw with raising of interest rates to curb inflation in this instance as this only works if inflation has been caused by consumer spending and in this case it isn't. This time inflation has been caused directly by the government and George Osborne's austerity measures and it is set to get a lot worse when the VAT rise comes in on January 4th 2011. Fuel at the pumps will go up by 4p a litre, this alone will send inflation spiralling causing further pressure on haulage contractors, this will send up the cost of food and clothes etc which in turn will cause inflation to rise. How does Mervyn King and George Osborne plan to bring this down? There is already strong evidence that motorists are cutting back on their journeys, so that again is clear evidence that the pressure is elsewhere in the system and NOT consumer led.

I hope this Tory led government have a plan B, and a plan C, and a plan D, because there is every sign that we are going to be needing them. Which in my opinion makes it even more foolhardy of George Osborne to *borrow* £10 billion in order to bail out the Irish economy, it is the British taxpayer that will have to find the payments on that loan as well as the interest. The UK is not in the Euro Zone, so we should not have bailed Ireland out, that was up to the EU not us, no matter how much of a trading partner Ireland is to the UK's economy, if we believe the Tory government then the UK was broke and simply could not afford to do this.

Mervyn King once launched a blistering attack on Britain's banks, describing the £1tn government support given to them as "breathtaking". King appeared then to be backing David Cameron and George Osborne's stance, who just wanted to let the banks fail and allow millions of people to lose their homes, jobs and businesses.
So what has changed since his criticisms of the then labour government? Why hasn't King come out and criticised the Tory led government for borrowing in excess of £10 billion to bail out the Irish economy and banks?  This is £10 billion plus interest that the UK is never likely to see returned, not this side of 50 years anyway, and we did not have to bail Ireland out that should have been left to the EU and to the IMF. What is King's perception of the fact that Osborne has just given this money to Ireland, yet has attached no caveat to it? Has not demanded that Ireland's corporation tax be brought into line with the UKs to make trading a level playing field? Ireland may be the UK's biggest trading partner and there may be merits as to why the UK should help Ireland out, but Ireland have not been a very good friend and neighbour to the UK. By having these ridiculously low corporation tax, Ireland actually took many UK companies away from the UK and even if Ireland doubled their tax, it would still be cheaper for companies to stay there rather than set up or return to the UK. Yet Ireland has been allowed to keep this rate of corporation tax, which arguably is what helped to cause Ireland's bankruptcy, it is OK to have low taxation, but not at the expense of the country's coffers.

Yet famously George Osborne once travelled to Ireland to listen and learn from their "wonderful" example on how to run the economy, practices that George Osborne was fully intending to put in place in the UK. No doubt this is something else that Mervyn King thought was a good idea too!

King once said: "The case for a serious review of how the banking industry is structured and regulated is strong."

So why hasn't King been pressurising the Tory government and Tory chancellor George Osborne into reforming the way banks work? Why has King stood back and said and done absolutely nothing, while George Osborne reduced the banking levy that the Labour government put in place by £1 billion? Why has King said nothing when the Tory prime minister David Cameron on one hand urged Tory and Liberal Democrat MEPs to vote for and push for less harsh measures on the banks, while deliberately misleading the British people at exactly the same time by pretending to talk tough on bankers bonuses? When it is this Tory government and Tory chancellor and Tory prime minister, who has just let the banks off entirely. And unbelievably today we learn that a planned meeting between the banks, and the ditherer Vince cable and the dithering George Osborne to discuss bankers bonuses has been called off because of the weather! Have these people not heard of video conferencing then?

"One member of the Bank's monetary policy committee, Adam Posen, has been vehemently waving a red flag about King's over-optimism on growth. The small spurtlet of recent months saw the OBR this week raise this year's predicted growth rate from 1.2% to 1.8% – hardly champagne-opening time. As Alan Johnson suggested, this is largely the tail-end effect of Labour's stimulus package, with some end-of-the-spend public sector construction, combined with a pre-VAT-rise Christmas rush. Posen is urgently signalling the risk of a slowdown ahead, and the need for more quantitative easing. He warns that the government's austerity drive will be "quite contractionary", its effects still to be felt. Posen also points to the danger of Japanese-style low growth, but King stands by the austerity he helped shape.
Most remarkable was Posen's accusation last week that King's support for George Osborne's austerity measures has been "excessively political". Appearing before the treasury select committee he told MPs that King was over-stepping the line between monetary and fiscal policy. His former MPC colleague Kate Barker told MPs she was also "extremely unhappy" at how strongly King was endorsing the government's position. They reported that others on the nine-strong committee were equally concerned – though not a majority."

Meanwhile former adviser on monetary policy to the Bank of England professor of economics David Blanchflower said:

"Mervyn King is one smart guy and that has always been abundantly clear. Unfortunately, it is his thirst for power and influence that has clouded his judgment one too many times. He has now committed the unforgivable sin of compromising the independence of the Bank of England by involving himself in the economic policy of the coalition. He is expected to be politically neutral but has shown himself to be politically biased and as a result is now in an untenable position. King must go.

During my time on the Monetary Policy Committee (MPC), King made it abundantly clear that members should not comment on fiscal policy and should stay out of party political matters. He has failed to follow his own advice. How could Ed Miliband or Alan Johnson ever trust King to give them advice on economic policy, now he has shown his true party political colours? Once independence has been compromised it can never be restored."

It is now time for the Governor of the Bank of England to resign, the Bank of England must retain its independence, it has served us well.

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